Options expiration occurred today without undue volatility, as hedging of a large amount of in-the-money short puts already helped fuel the market’s recent down move. The H4 surpassed the Z3 as the contract with the most open interest today as the index funds ramp up their rolls, and it looks like the low in the Z/H spread may be in.
Specs have sold on expectations of an increase in US production, which was seemingly backed by the slow build-up of cert stocks now numbering over 200k bales including awaiting stocks. Fears of reserve sales in China and therefore an expected slowdown in US export demand also made headlines.
The USDA WASDE report, the first in two months, failed to deliver though as US production increased only to 13.1m bales, and the most other significant change was made to Indian stocks in years past. Export demand, including from China, has continued based on attractive prices; shipments, meanwhile, lag due to the late crop and an inefficient warehousing system akin to that seen in the metals markets.
Although China is likely to release reserves in coming months, imports will not completely turn off and, besides, this fear should mostly be in the market. And with domestic basis levels in the US extremely firm, the main question regarding the cert stock is the precise timing of the de-certs (there were 5k) and their eventual owner.
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